| Summary of Significant Accounting Policies | 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Basis of
Presentation
The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
inter-company transactions and balances have been eliminated in
consolidation. Preparation of Financial
Statements and Use of Estimates
The
accompanying financial statements have been prepared by the
Company, and reflect all adjustments, which, in the opinion of
management, are necessary for fair presentation. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of
income and expenses during the reporting periods. Actual results
may differ from those estimates and such differences may be
material to the consolidated financial statements. Such estimates
relate to fair values ascribed to the assets and liabilities
acquired in connection with the Dover Acquisition, revenue
recognition, the allowance for doubtful accounts, inventory
valuation, depreciation, product warranty costs, stock-based
compensation and income taxes, among others. Revenue
Recognition
The Company
recognizes revenue based on guidance provided in Topic 605,
Revenue Recognition Multiple-Deliverable Revenue
Arrangements
Revenue related
to equipment sales is recognized when: (a) the Company has a
written sales agreement; (b) delivery has occurred or service
has been rendered; (c) the price is fixed or determinable;
(d) collectability is reasonably assured; (e) the
equipment delivered is a standard product with historically
demonstrated acceptance; and (f) there is no unique customer
acceptance provision or payment tied to acceptance or an
undelivered element significant to the functionality of the system.
Generally, payment terms are time based after product shipment.
From time to time, sales to a customer may involve multiple
elements, in which case revenue is recognized on the delivered
element provided that (1) the undelivered element is a proven
technology, (2) there is a history of acceptance on the
equipment with the customer, (3) the undelivered element is
not essential to the customer’s application, (4) the
delivered item(s) has value to the customer on a stand-alone basis,
and (5) if the arrangement includes a general right of return
relative to the delivered item(s), delivery or performance of the
undelivered item(s) is considered probable and substantially in the
control of the Company. The arrangement consideration, or the
amount of revenue to be recognized on each separate unit of
accounting, is allocated at the inception of the arrangement to all
deliverables on the basis of their relative selling
price.
Revenue related
to maintenance and service contracts is recognized ratably over the
duration of the contracts. Net service sales as presented in the
Company’s Consolidated Statement of Operations and
Comprehensive Income (Loss) includes revenue associated with
LTX-Credence maintenance or service contracts only, and excludes
ECT and Multitest. ECT and Multitest generally do not provide
maintenance and service contracts, but rather sell spare parts and
other components, and as a result these sales are recognized as net
product sales in the Company’s Consolidated Statement of
Operations and Comprehensive Income (Loss). Revenue related to
spare parts and components is recognized when the four main
criteria listed above are met. Generally customer acceptance is not
required for spare parts and component sales. Inventories
Inventories are
stated at the lower of cost or market, determined on the first-in,
first-out (“FIFO”) method, and include materials, labor
and manufacturing overhead. The components of inventories,
excluding the Interface Board Business, are as follows:
As of
July 31,
2015 2014
(in
thousands)
Material and purchased
components $ 27,249 $ 20,813
Work-in-process 15,250 23,442
Finished equipment,
including inventory consigned to customers 18,094 23,429
Total
inventories $ 60,593 $ 67,684
The Company
establishes inventory reserves when conditions exist that indicate
inventory may be in excess of anticipated demand or is obsolete
based upon assumptions about future demand for the Company’s
products or market conditions. The Company regularly evaluates its
ability to realize the value of inventory based on a combination of
factors including the following: forecasted sales or usage,
estimated product end of life dates, estimated current and future
market value and new product introductions.
Purchasing and
usage alternatives are also explored to mitigate inventory
exposure. When recorded, reserves are intended to reduce the
carrying value of inventory to its net realizable value. As of
July 31, 2015 and July 31, 2014, inventory is stated net
of inventory reserves of $46.9 million and $45.2 million,
respectively. If actual demand for products deteriorates or market
conditions are less favorable than projected, additional inventory
reserves may be required. Such reserves are not reversed until the
related inventory is sold or otherwise disposed.
The following
table shows sales of previously reserved inventory and the
inventory reserves released for these sales for the fiscal years
ended July 31, 2015, 2014, and 2013:
Fiscal Year Ended July 31,
2015 2014 2013
(in
thousands)
Sales of previously
reserved inventory $ 1,664 $ 821 $ 869
Inventory reserves released
for these sales 643 483 300 Goodwill and Other
Intangibles
In accordance
with FASB ASC Topic 350— Intangibles—Goodwill and
Other
In accordance
with ASC 350, the Company performed its goodwill impairment test as
of July 31, 2015 and 2014, and determined that no adjustment
to goodwill was necessary. As of July 31, 2015, the fair value
of the reporting units to which goodwill is allocated substantially
exceeded the carrying values of those reporting units. The
observable inputs used in the Company’s Discounted Cash Flow
(DCF) method for estimating the fair value of the reporting units
include discount rates at the Company’s weighted-average cost
of capital. The Company derives discount rates that are
commensurate with the risks and uncertainties inherent in its
respective businesses and its internally developed projections of
future cash flows. In addition, the Company determined the
projected future cash flows of the reporting units for the residual
period using the Gordon growth method which assumes that the
reporting unit will grow and generate free cash flow at a constant
rate. The Company believes that the Gordon growth method is the
most appropriate method for determining the residual value because
the residual value is calculated at the point at which the Company
has assumed that the reporting units have reached stable growth
rates. The Company’s goodwill consists of the
following:
Goodwill July 31, July 31,
(in
thousands)
Semiconductor Test
Reporting Unit
Merger with Credence
Systems Corporation (August 29, 2008) $ 28,662 $ 28,662
Acquisition of Step Tech
Inc. (June 10, 2003) 14,368 14,368
Contactors Reporting
Unit
Acquisition of Titan
Semiconductor Tool LLC (February 2, 2015) 820 —
Total goodwill $ 43,850 $ 43,030
Amortizable
intangible assets which relate to the acquisition of Titan
Semiconductor Tool LLC (“Titan”), and the Acquired
Businesses and the merger with Credence Systems Corporation
(“Credence”), and the acquisition of Titan consist of
the following, and are included in intangibles asset, net on the
Company’s Consolidated Balance Sheets:
As of July 31,
2015
Description Estimated Gross Carrying Accumulated Net Amount
(in years) (in thousands) (in thousands) (in thousands)
Developed technology
(Credence, ECT, Multitest, atg-Luther & Maelzer, and
Titan) 6-20 $ 29,882 $ (26,856 ) $ 3,026
Customer
Relationships—ECT, Multitest, atg-Luther & Maelzer,
and Titan 2 1,844 (992 ) 852
Maintenance
agreements—ASL & Diamond 7 1,900 (1,629 ) 271
Trade Names 10 70 (6 ) 64
Non-compete
Agreements 1 8 (8 ) —
Total intangible
assets $ 33,704 $ (29,491 ) $ 4,213
As of July 31,
2014
Description Estimated Gross Carrying Accumulated Net Amount
(in years)
(in thousands)
(in thousands)
(in thousands)
Developed technology
(Credence, ECT, Multitest, and atg-Luther &
Maelzer) 6-10 $ 29,262 $ (25,855 ) $ 3,407
Customer
Relationships—ECT, Multitest, atg-Luther &
Maelzer 2 1,174 (449 ) 725
Maintenance
agreements—ASL & Diamond 7 1,900 (1,357 ) 543
Total intangible
assets $ 32,336 $ (27,661 ) $ 4,675
Intangible
assets, other than trademarks owned by the Company, are amortized
based upon the pattern of estimated economic use over their
estimated useful lives. The weighted average estimated remaining
useful life over which these intangible assets will be amortized is
4.3 years.
The Company
expects the remaining amortization for these intangible assets as
of July 31, 2015 to be:
Year ending
July 31, Amount
2016 $ 1,216
2017 669
2018 472
2019 379
Thereafter 1,477
Total $ 4,213
The
identifiable intangible assets associated with the Dover
Acquisition include $6.4 million of trademarks. The Company
believes these trademarks will contribute to the Company’s
cash flows indefinitely. Therefore, in accordance with ASC 350, the
Company has assigned an indefinite useful life to the trademarks,
and will not amortize the trademarks until their useful lives are
no longer indefinite. These assets are subject to an annual
impairment test or more frequently if triggering events occur. For
the year ended July 31, 2015, the Company assessed qualitative
factors to determine if a two-step quantitative impairment test was
necessary. The Company determined, based on qualitative assessment,
that it was more likely than not that the trademarks’ fair
value was greater than their carrying amount, therefore no
quantitative assessment was required, and there was no adjustment
to the carrying value of the trademarks. Long Lived
Assets
On an ongoing
basis, management reviews the value of and period of amortization
or depreciation of the Company’s long-lived assets. In
accordance with Topic 360, Property, Plant and Equipment
Foreign Currency
Remeasurement
The financial
statements of the Company’s foreign subsidiaries are
remeasured in accordance with Topic 830, Foreign Currency
Matters, Product Warranty
Costs
Certain of the
Company’s products are sold with warranty provisions that
require it to remedy deficiencies in quality or performance of
products over a specified period of time at no cost to its
customers. The Company generally offers a warranty for most of its
products, the standard terms and conditions of which are based on
the product sold and the customer. For all products sold, subject
to a warranty, the Company accrues a liability for the estimated
cost of standard warranty at the time of shipment. Factors that
impact the warranty liability include the number of installed
products, historical and anticipated product failure rates,
material usage and service labor costs. The Company periodically
assesses the adequacy of its recorded liability and adjusts amounts
as necessary.
The following
table shows the change in the product warranty liability, as
required by Topic 460, Guarantees,
Product
Warranty Activity 2015 2014
(in
thousands)
Balance at beginning of
period $ 3,206 $ 1,217
Warranty reserve acquired
from ECT and Multitest — 1,926
Warranty expenditures for
current period (2,422 ) (4,306 )
Changes in liability
related to pre-existing warranties (299 ) (141 )
Provision for warranty
costs in the period 2,498 4,510
Balance at end of
period $ 2,983 $ 3,206
Trade Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts
receivable are recorded at the invoiced amount, do not bear
interest, and typically have a contractual maturity of ninety days
or less. A majority of the Company’s trade receivables are
derived from sales to large multinational semiconductor
manufacturers throughout the world. The volatility of the
industries that the Company serves can cause certain of its
customers to experience shortages of cash, which can impact their
ability to make required payments. An allowance for doubtful
accounts is maintained for potential credit losses based upon the
Company’s assessment of the expected collectability of all
accounts receivable. The allowance for doubtful accounts is
reviewed periodically to assess the adequacy of the allowances. In
any circumstances in which the Company is aware of a
customer’s inability to meet its financial obligations, an
allowance is provided, which is based on the age of the
receivables, the circumstances surrounding the customer’s
financial situation, and historical experience. If circumstances
change, and the financial condition of customers is adversely
affected resulting in their inability to meet their financial
obligations to the Company, additional allowances may be
recorded.
Engineering and Product
Development Costs
The Company
expenses all engineering and product development costs as incurred.
Expenses relating to certain software development costs, subject to
capitalization in accordance with the Topic 985, Software, Shipping and Handling
Costs
Shipping and
handling costs are included in cost of sales in the consolidated
statements of operations. Shipping and handling costs were $7.1
million, $4.5 million, and $2.7 million for fiscal years ended
July 31, 2015, 2014, and 2013, respectively. Income
Taxes
The Company
recorded an income tax provision of $2.6 million for the fiscal
2015, primarily due to foreign taxes in profitable
locations.
The Company
recorded an income tax provision of $0.8 million for the fiscal
year ended July 31, 2014 (“fiscal 2014”),
primarily due to $1.3 million of foreign taxes in profitable
locations partially offset by $0.5 million of tax benefit relating
to the release of valuation allowance as a result of the Dover
Acquisition. Purchase accounting for the Dover Acquisition required
the establishment of a deferred tax liability related to the
book-tax basis differences of identifiable intangible assets which
created an additional source of U.S. future taxable income that
resulted in a release of $0.5 million of the Company’s U.S.
valuation allowance.
As of
July 31, 2015 and July 31, 2014, the total unrecognized
income tax benefits were $6.3 million and $6.6 million,
respectively, of which $2.7 million and $3.0 million, respectively,
if recognized, would impact the Company’s income tax rate.
The Company recognizes interest and penalties related to uncertain
tax positions as a component of provision for income taxes. For
both July 31, 2015 and July 31, 2014, the Company had
accrued approximately $1.0 million for potential payment of accrued
interest and penalties.
The Company
conducts business globally and, as a result, the Company and its
subsidiaries or branches file income tax returns in the U.S.
federal jurisdiction and various state and foreign jurisdictions.
In the normal course of business, the Company is subject to
examination by taxing authorities throughout the world, including
such major jurisdictions as the United States, Singapore, France
and Germany. With few exceptions, the Company is no longer subject
to U.S. federal, state and local or non-U.S. income tax
examinations for years prior to 1998.
As a result of
the merger with Credence on August 29, 2008, a greater than
50% cumulative ownership change in both entities triggered a
significant limitation on net operating loss carryforward
utilization. The Company’s ability to use the acquired U.S.
net operating loss and credit carryforwards is subject to annual
limitation as defined in sections 382 and 383 of the Internal
Revenue Code. The Company currently estimates that the annual
limitation on its use of net operating losses generated through
August 29, 2008 is approximately $10.1 million which, based on
currently enacted federal carryforward periods, limits the amount
of net operating losses that are available for utilization to
approximately $202.0 million. The Company will continue to assess
the realizability of these carryforwards in subsequent
periods. Accounting for
Stock-Based Compensation
The Company has
equity awards outstanding under various stock-based compensation
plans, including the 2010 Stock Plan (“2010 Plan”),
2004 Stock Plan, 2001 Stock Plan, 1999 Stock Plan, and 1993 Stock
Plan. In addition, the Company assumed the Credence 2005 Stock
Incentive Plan in connection with its acquisition of Credence. The
Company can only grant awards from the 2010 Plan.
During fiscal
2015, the Company granted 938,307 Restricted Stock Units
(“RSUs”) to certain executives, directors and
employees, with time-based vesting terms ranging from one to four
years. Of these, 305,000 RSUs were granted to
executives.
The Company
recognizes stock-based compensation expense on its equity awards in
accordance with the provisions of Topic 718,
Compensation—Stock Compensation,
For the fiscal
years ended July 31, 2015, 2014, and 2013, the Company
recorded stock-based compensation expense as follows:
Fiscal Year Ended
July 31,
2015 2014 2013
(in
thousands)
Cost of sales $ 224 $ 164 $ 148
Engineering and product
development expenses 913 632 611
Selling, general and
administrative expenses 6,414 4,623 3,958
Total stock-based
compensation expense $ 7,551 $ 5,419 $ 4,717
As of
July 31, 2015, there was approximately $12.1 million of
unrecognized stock-based compensation expense related to
share-based equity grants to employees that is expected to be
recognized over the next 2.55 weighted-average years. Net income (loss) per
Share
Basic net
income (loss) per common share is computed by dividing net income
(loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted net
income (loss) per common share reflects the maximum dilution that
would have resulted from the assumed exercise and share repurchase
related to dilutive stock options and RSUs, and is computed by
dividing net income (loss) by the weighted average number of common
shares and the dilutive effect of all securities
outstanding.
Reconciliation
between basic and diluted net income (loss) per share is as
follows:
Fiscal Year Ended
July 31,
2015 2014 2013
(in thousands, except per share data)
Net income
(loss) $ 28,226 $ 833 $ (12,127 )
Basic EPS
Weighted average shares
outstanding—basic 53,658 48,214 47,719
Basic EPS $ 0.53 $ 0.02 $ (0.25 )
Diluted EPS
Weighted average shares
outstanding—basic 53,658 48,214 47,719
Plus: impact of stock
options and unvested restricted stock units 873 936 —
Weighted average shares
outstanding—diluted 54,531 49,150 47,719
Diluted EPS $ 0.52 $ 0.02 $ (0.25 )
For the fiscal
years ended July 31, 2015, 2014 and 2013, options to purchase
approximately 0.1 million, 0.4 million, and
1.0 million shares, respectively, of common stock were not
included in the calculation of diluted earnings per share because
the effect of including the options would have been anti-dilutive.
These options could be dilutive in the future. In accordance with
the contingently issuable shares guidance of the FASB ASC Topic
260, Earnings Per Share Cash and Cash
Equivalents and Marketable Securities
The Company
considers all highly liquid investments that are readily
convertible to cash and that have original maturity dates of three
months or less to be cash equivalents. Cash and cash equivalents
consist primarily of operating cash, money market accounts and
reverse repurchase agreements. Marketable securities consist
primarily of debt securities that are classified as
available-for-sale, in accordance with Topic 320,
Investments—Debt and Equity Securities,
The market
value and maturities of the Company’s marketable securities
are as follows:
Total Amount
(in thousands)
July 31,
2015
Due in less than one
year $ 36,447
Due in 1 to 3
years 24,146
Total marketable
securities $ 60,593
Total Amount
(in thousands)
July 31,
2014
Due in less than one
year $ 21,778
Due in 1 to 3
years 17,881
Total marketable
securities $ 39,659
The market
value and amortized cost of marketable securities are as
follows:
Market Amortized
(in
thousands)
July 31,
2015
Corporate (a) $ 15,996 $ 15,951
Government 25,567 25,381
Mortgage-Backed 2,670 2,674
Asset-Backed 16,360 16,335
Total $ 60,593 $ 60,341
Market Amortized
(in
thousands)
July 31,
2014
Corporate (a) $ 21,070 $ 20,884
Government 5,045 5,038
Mortgage-Backed 1,920 1,923
Asset-Backed 11,624 11,609
Total $ 39,659 $ 39,454
(a) There is no held to
maturity investments included in the above figures as of
July 31, 2015 and 2014, respectively.
Realized gains,
losses and interest income are included in interest income in the
Statements of Operations. Unrealized gains and losses are reflected
as a separate component of comprehensive income (loss) within
Stockholders’ Equity. The Company analyzes its securities
portfolio for other-than-temporary impairment on a quarterly basis
or upon occurrence of a significant change in circumstances. There
were no other-than-temporary impairment losses recorded in the
fiscal years ended July 31, 2015 or 2014.
The following
table summarizes marketable securities and related unrealized gains
and losses as of July 31, 2015 and 2014:
July 31, 2015 Market Unrealized
(in
thousands)
Securities < 12 months
unrealized losses $ 17,767 $ (28 )
Securities > 12 months
unrealized losses 11,592 (23 )
Securities < 12 months
unrealized gains 18,681 12
Securities > 12 months
unrealized gains 12,553 20
Total $ 60,593 $ (19 )
July 31, 2014 Market Unrealized
(in
thousands)
Securities < 12 months
unrealized losses $ 5,101 $ (19 )
Securities > 12 months
unrealized losses 9,739 (24 )
Securities < 12 months
unrealized gains 16,677 20
Securities > 12 months
unrealized gains 8,142 23
Total $ 39,659 $ —
Interest income
and realized gains and losses from sales of marketable securities,
included in interest income in the Statement of Operations, are as
follows:
Fiscal Year Ended
July 31,
2015 2014 2013
(in
thousands)
Interest income on
marketable securities $ 1,221 $ 1,326 $ 2,483
Realized gain (loss) from
sales of securities 22 16 96
Total $ 1,243 $ 1,342 $ 2,579
Fair Value of Financial
Instruments
The Company
determines its fair value measurements for assets and liabilities
based upon the provisions of Topic 820, Fair Value Measurements
and Disclosures,
Topic 825 to
the FASB ASC, Financial Instruments, Concentration of Credit
and Supplier Risk
Fiscal Year Ended
July 31,
2015 2014 2013
(in millions except
%’s)
Revenue from top ten
customers 54 % 51 % 70 %
Accounts receivable from
the same top ten customers $ 43.1 $ 48.6 $ 21.2
Sales to customers outside
the United States $ 312.5 $ 239.2 $ 126.0
Financial
instruments, which potentially subject the Company to
concentrations of credit risk, are cash equivalents, marketable
securities and accounts receivable. All of the Company’s cash
equivalents and marketable securities are maintained by major
financial institutions. The Company periodically reviews these
investments to evaluate and minimize credit risk. Concentration of
credit risk with respect to accounts receivable is limited to
certain customers to whom the Company makes substantial sales. To
reduce risk, the Company routinely assesses the financial strength
of its customers. The Company does not require collateral, although
the Company does obtain letters of credit on sales to certain
foreign customers. During fiscal 2015 the Company did not write off
any accounts receivable. During fiscal 2014, the Company wrote off
$0.1 million of accounts receivable. There were no write-offs for
the fiscal year ended July 31, 2013.
The Company
outsources certain components and subassemblies for our test
equipment to contract manufacturers other than its sole source
supplier manufacturer. The Company’s products incorporate
standard components and prefabricated parts manufactured to its
specifications. These components and subassemblies are used to
produce testers in configurations specified by its customers. Some
of the standard components for the Company’s products are
available from a number of different suppliers; however, many such
standard components are purchased from a single supplier or a
limited group of suppliers. Although the Company believes that all
single sourced components currently are available in adequate
amounts, shortages or delivery delays may develop in the future.
The Company is dependent on certain semiconductor device
manufacturers, who are sole source suppliers of custom components
for its products. The Company has no written supply agreements with
these sole source suppliers and purchases its custom components
through individual purchase orders. The Company continuously
evaluates alternative sources for the manufacture of our custom
components and the supply of our standard components; however, such
alternative sources may not meet its required qualifications or
have capacity that is available to the Company. Property and
Equipment
Property and
equipment acquired is recorded at cost. The Company provides for
depreciation and amortization using the straight-line method.
Charges are made to operating expenses in amounts that are
sufficient to amortize the cost of the assets over their estimated
useful lives. Equipment spares used for service and internally
manufactured test systems used for testing components and
engineering projects are recorded at cost and depreciated over
three to seven years. Repair and maintenance costs that do not
extend the lives of property and equipment are expensed as
incurred. The Company’s property and equipment as of
July 31, 2015 and July 31, 2014 are summarized as
follows:
As of
July 31, Estimated Useful
2015 2014
(in thousands) (in
years)
Equipment spares $ 41,398 $ 45,572 5 or 7
Machinery, equipment and
internally manufactured systems 32,068 38,840 3-7
Office furniture and
equipment 2,518 3,179 3-7
Purchased
software 506 382 3
Land 6,106 5,602 —
Buildings 8,634 9,008 10 –
40 years
Leasehold
improvements 11,029 7,379 Term of lease or
exceed 10
years
Property and equipment,
gross 102,259 109,962
Accumulated depreciation
and amortization (70,809 ) (77,809 )
Property and equipment,
net $ 31,450 $ 32,153
Depreciation
expense was $6.4 million, $6.1 million, and $6.5 million for the
fiscal years ended July 31, 2015, 2014, and 2013,
respectively. Recent Accounting
Pronouncements
In May 2014,
the FASB issued ASU 2014-09, Revenue from Contracts with
Customers (Topic 606),
In April 2014,
the FASB issued ASU No. 2014-08, Presentation of Financial
Statements ASC 360 Property, Plant and Equipment (ASC 205),
Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity
In April 2015,
the FASB issued ASU No. 2015-03, Interest—Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs |
